EuroEconomica, Vol 37, No 3 (2018)

Measuring the Performance of Labor Market Indicators on Pakistan’s Economic Growth: Time Series Evidence from 1975-2016

Alia Rani, Khalid Zaman

Abstract

The objective of the study is to analysis different labour market indicators including sectoral employment, literacy rate, labour force participation rate, unemployment and educational factors, which resulting impact on Pakistan’s economic growth, for a period of 1975 to 2016. The study used conventional econometrics techniques including unit root test, cointegration test and robust least squares test. The study further used impulse response function and variance decomposition analysis for inter-temporal relationship between the variables for the next ten years time period. The results show that except educational expenditure, the remaining variables exhibit first differenced stationary. The study confirmed the cointegration relationship between the stated variables. The estimates of robust least squares confirmed that employment in agriculture and services sector substantially increases Pakistan economic growth by 1.11% and 2.10% respectively. Primary and secondary enrolment further increases country’s economic growth with the elasticity estimate of 0.477% and 0.322% respectively. Economic growth influenced by high unemployment rate and low labour force participation rate, which confirmed the structural flaws in the labour market. The impact of government education expenditure on economic growth is positive, which implies that high public spending on education is imperative for economic development of a country. The results of impulse response function show that labour market indicators substantially influenced Pakistan’s economics growth for the next year’s time period, while variance decomposition analysis confirmed that secondary school enrolment and labour force participation rate both will largely influenced per capita income for a next year’s time period. The study gives new insights of the relationships that need re-corrective measures to reduce labor market rigidities with sound economic policies of a country.

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